The Hindu Business Line : ‘There’s no one magic formula to tackling pricing pressure’

There are multiple ways (to tackle pricing pressure). There is no one magic formula. But it has to beneficial to customer and vendor.— Mr S. Ramadorai, CEO and MD, TCS.

Adith Charlie
Kripa Raman

Mumbai, May 3 The fourth quarter of the previous fiscal was one of the most difficult quarters for the Indian IT industry as a whole.

Though companies such as Tata Consultancy Services have managed to increase the offshore component of revenues, pressure on pricing and ultimately margins still continue.

For more insight on the demand-side issues facing the IT industry, Business Line caught up with Mr S. Ramadorai, CEO and MD of Tata Consultancy Services.

Mr Ramadorai, who has been with the Tata group company for over 30 years, talks about how vendors such as TCS can help corporates who have been impacted by the global credit crunch. Forty five per cent of your customers are seeing a 50 per cent decline in profits. How do you cushion yourself from the impact?

The only immediate plan is a lot of offshoring, and lot more of strategic initiatives where we can take cost out of client organisations.

Are you satisfied with the present offshore-onshore revenue ratio (45:55)? Do you think it can cross the 45 per cent barrier, say to 50?

Offshore revenue at 45 per cent of overall revenues was the target which we have managed to achieve. Definitely, there is scope to push it beyond 45. I do not know whether it would be 50 plus, but upwards of 45 per cent (of overall revenues) does look feasible.

But in spite of the offshore leverage, the pricing pressure continues...

Pricing pressure is driven by the health of the company and hence that will always be there in the current economic scenario. Our response to that is whether we can work differently by doing more work offshore.

If they (customers) are already doing 70-80-90 (per cent offshore) then our response will be ‘please tell me what is the cost reduction you are expecting and we could look into it’. We can do some business model reengineering, business transformation, then apply IT to it. Or if the client is working with three or four vendors, we could come up with ways to consolidate the work and pass on some benefits to the customers.

Though there are multiple ways, there is no one magic formula. The simplest would be for the customer to ask for a price reduction and me, as the vendor, giving it. You keep on asking for price reduction and I keep on reducing. Finally I will not exist as an organisation and will not have anybody to provide IT solutions. So it has to be mutually beneficial.

What happens when you are in a fairly advanced stage in a project and then the client starts going under? You cannot suddenly abandon the project, can you?

There is no generic answer. Imagine a specific client who has been a good paymaster but suddenly goes bankrupt. People may say you should have captured early signs of them going bankrupt.

In today’s environment, unfortunately, the signs are not there. If the client company is in the process of getting restructured, one cannot retrieve past dues until the legal process is completed. However, once the new management takes over there could be new opportunities in the pipeline.

As a service provider, my response should not be ‘since these guys did not pay me I do not want to go near them again’. Once the client company has cleaned up and is willing to go do the right things in terms of payments, then one should definitely continue working with them. And these are actual situations that I am describing to you.

Prior to the dotcom bust the IT industry was growing at 50-60 per cent. After the dotcom bust, offshoring momentum picked up, catapulting top-tier IT firms into the global arena. However, post the dotcom bust, the IT industry grew between 30 and 35 per cent. Some experts say that once the current crisis ends, offshoring momentum will again pick up but growth would be restricted to 10-15 per cent only simply because of the maturity of the industry. Would you agree with this theory?

I do not agree with that. Technology is going to be an integral part of every business. What I do in my own company today is very different from what I did three years ago.

With technology, I can run this company by not being in my office for 365 days but by sitting in any part of India or any international locations. Hence, I do not see any reason to believe why technology adoption will come down. If technology adoption is healthy, so will be the growth rates.

(To be continued)